Incorporating alternative investments into defined contribution plans has long been touted as a strategy to allow for more diversification and enhance returns for investors. However, plan sponsors tend to be hesitant to add illiquid assets to their investment menus for a myriad of reasons—most notably cost and litigation risk.

Since President Donald Trump’s 2024 election victory, discussion of incorporating alternative assets, such as private equity and even cryptocurrency, into 401(k) plans has resurfaced. While defined benefit pension funds have historically maintained higher allocations to alternatives, it remains to be seen if DC plan sponsors will offer participants access to alternative investment options, despite concerns related to governance and litigation.

Bill Ryan, a partner in and defined contribution leader at NEPC, argues that the industry has already administratively solved for the issue of incorporating alts into DC plans. For example, he said Washington has, for the past five years, put private equity into the state’s DC plan through target-date funds, and the University of California Retirement Plan historically had private equity target allocation in a target-risk fund.

“Most large-cap active growth managers have less than 5% in a private placement or private equity in their mutual funds already, so private equity and private markets are in DC plans and are fully functioning,” Ryan says.

Fiduciary Risk

However, Ryan says there is an “asymmetric risk” to the fiduciary when offering any sort of alternative investment option because the reported fees tend to be the highest when the investment performs the best.

The Employee Retirement Income Security Act requires plans to update their investment fee disclosures, so if private markets outperform public equities, it may show that the fees went from 60 basis points to 120 basis points, for example. Even though this may have been a positive outcome for participants, plaintiffs’ attorneys may feel inclined to sue the plan sponsor because of the large fee increase.

In a U.S. Supreme Court case against Intel Corp. in 2021, plaintiffs alleged that the investment policy committee breached its fiduciary duties by investing a significant portion of the plan’s assets in risky and high-cost hedge fund and private equity investments. However, in 2022, Intel Corp. won the case, as the Supreme Court ultimately ruled that a prudent fiduciary that properly evaluates the risk and returns of alternative investments can add them to the 401(k) menu if, after an objective and thorough process, the decision is in the best interest of participants.

“It’s not that we can’t administratively deliver private markets,” Ryan says. “It’s these ancillary things that are hangnails that intimidate plan sponsors from doing it.”

Ryan emphasizes that higher fees are not necessarily a bad outcome for participants, but it can be risky for the plan sponsors because such fee disclosure often leads to litigation. Plan sponsors often do not get the chance to defend themselves and justify that the investment performed well and the fees were reasonable until they are in court.

Amy Keiser, vice president of retirement product and solutions at Principal Financial Group, says plan sponsors have a fiduciary duty to understand and evaluate alternative investment options relative to other investments the plan offers. As a result, Keiser says, plans need data measuring performance, price and risk, and recordkeepers need to be able to deliver this data to plan sponsors.

She adds that retirement plans are made up of a range of investors, including some who are financially savvy and sophisticated investors, and others who are new to investing or lack financial confidence. When offering alternative investment options, within a target-date fund or as stand-alone offerings, Keiser says it is important to for plan sponsors to consider how they will educate all participants about the investments and provide them the tools they need to make the best decisions.

“Naturally, when people want to get their money out [of the plan], or they want to take a loan … they may have questions, so our call center agents and our digital experiences need to be able to help them to understand if there [are] unique features around the alternative investment,” Keiser says. “Depending on how it’s structured, there could be a liquidity [issue] that needs to be addressed.”

She notes that small-to-medium-sized businesses often do not have time to thoroughly evaluate these investment options, so having an adviser or an independent third-party investment fiduciary company may be beneficial.

Regulatory Environment

Ryan said the Trump administration will create more regulatory support for private markets and provide a pathway for more adoption of alts in DC plans over the next four to five years.

“But the risk is: What happens in seven or eight years … when there’s a new administration?” Ryan says. “At that point, you’re already invested in these private market vehicles, [and] you may or may not be able to get out of them.”

Josh Cohen, managing director and head of client solutions for PGIM DC Solutions, says there is an opportunity for policymakers to create a safe harbor that allows for alternatives in DC plans.

“There’s nothing in ERISA that prevents plans from adding alternatives, and many already have,” Cohen says. “But there are certainly various things that regulators and the Department of Labor could at least signal [their support of] or support plans consider[ing] this.”

Cohen argues that litigation risk is one of the biggest obstacles preventing widespread adoption of alts in DC plans.

“Whether it’s investments, retirement income [or] advice … we are continuing to see innovation stalled by plan sponsors,” Cohen says. “Now we’re seeing even with [environmental, social and governance factors], there is litigation risk. So I think if there’s an ability to reduce the amount of frivolous lawsuits, while still giving participants the right to pursue claims when there [are] breaches of fiduciary duty, I think that could go a long way … to make the ground more fertile for innovation.”

But Cohen says the “fiduciary case is there” to offer alternatives in DC plans, as ERISA requires plan sponsors to do what is in the best interests of participants, and constantly worrying about reducing a company’s fiduciary risk is not always the best way to do that. The fiduciary environment of an ERISA retirement plan could be the “perfect place” to offer such investments, he says. Otherwise alternative asset classes tend to only be available to high-net-worth investors, because the average American may not pass wealth-based sophisticated investor rules that limit some investments to people with a higher net worth.

“You have professionals overseeing this, [and] oftentimes they’re in professionally allocated vehicles like a target-date fund, and plans can use their buying power to reduce fees,” Cohen says. “Even if participants could get access to this outside of the plan, it would be much more expensive than what they could get in the plan. And again, many aren’t even allowed to get access. So I think there is a real fairness issue too.”

Target-Date Fund Solutions

Cohen says it is most common for plans to offer alternatives as part of a multi-asset solution, such as a target-date fund.

Lockheed Martin Investment Management Co., for example, began including a private equity co-investment sleeve in the TDFs of the company’s DC plans. Private equity was incorporated into the plan’s TDFs officially in July 2024, and the investment committee is gradually investing in the private equity funds over a two-year period until it reaches target allocations.

The most aggressive TDFs in Lockheed’s lineup only have about 7% invested in a private equity fund, and the less-aggressive TDFs have very little or no investment in private equity. Neuberger Berman was selected by Lockheeds’ investment team to partner on the co-investment sleeve. The co-investment sleeve also has daily net asset value pricing, which provides significant liquidity.

Ryan notes that Lockheed Martin is in an advantageous position to offer this sort of investment, as the company works with an investment staff and has experience with private equity in the firm’s DB plan. He says the level of sophistication and governance would be difficult to replicate at a smaller company.

Among DC plans that offer alternative investment options, Cohen says private real estate is “leading the way” because the private real estate industry has established more standards for trading and valuations.

“There’s really been a movement toward a standardized approach that’s gotten people very comfortable, and it’s well documented and consistently applied,” Cohen says. “Now you’re seeing momentum in other asset classes using similar concepts … that the private real estate industry has been able to develop over about the last decade. As a result, you’re seeing greater interest in things like private debt. I think [that’s] going to be the next area where you’ll see the most activity.”

Overall, Ryan says private markets are in DC plans today, and more adoption is anticipated.

“Access is extremely important, especially with a very [pro-alternatives] administration, and we anticipate an uptick in flows and adoption, but it should be mindful, with the appropriate governance around it,” he says.

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